May’s currency update

The last three months have not made a great deal of difference to the value of euro. It is half a cent above its average daily price against the US dollar and half a cent below its three-month average against sterling. Over the last month the story is very similar; the euro has conceded three quarters of a cent to the pound and is stronger by half a cent against the dollar.

The situation today is almost exactly as it was at the turn of the year. The European Central Bank’s tussle with persistently low inflation could see it embark on a money-printing programme similar to those carried out by Britain, America and Japan. The US Federal Reserve is winding down its own presses but not as quickly as investors would prefer. And the Bank of England is being deliberately vague about its plans to increase sterling interest rates.

So investors are left to scrutinise the economic data as they appear, reading into them whatever they think they can about the future. In April they failed to come down strongly in favour of any of the major currencies. Sterling came out on top because the UK data were stronger than the rest of the field. The Australian and New Zealand dollars were at the rear of the field because of nervousness about “risky” investments. The US dollar struggled, especially after news that its economy hardly grew at all in the first quarter of the year. And the euro soldiered on, aided and abetted by the president of the ECB.

ECB President Mario Draghi would like his currency to settle down, even to weaken, to help him return Euroland inflation – currently 0.7% – to its 2% target. He says he has a money-printing strategy on the stocks, ready to launch if inflation remains low. But the market’s assumption is that the ECB will do its utmost to avoid going down that path. Investors are therefore relaxed about the euro’s monetary outlook and are not inclined to punish it for something that has not yet happened and might never. They rattle the euro’s cage from time to time, just to show they are taking an interest, but they have no inclination to give it a hard time. Unless and until the ECB does act to dampen the currency and lift inflation – and it is not inconceivable that the move could come in early May – the euro is unlikely to suffer to much damage.

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